China’s credit curbs pose mounting risk to commodities

Telegraph: The big global banks are quietly preparing for a slide in commodity prices over coming months as China clamps down on excess lending and the US Federal Reserve takes away the liquidity pot.

“We believe overheating risks in China are escalating,” said Michael Lewis, commodities chief at Deutsche Bank. “Heading into the second quarter, we believe China will become the main source of event risk for commodity markets, specifically industrial metals.”

Mr Lewis said Beijing is likely to slash growth in spending on infrastructure from 120pc last year to just 7pc this year. Deutsche expects China’s central bank to cut loan quotas by almost a quarter to 7.5 trillion yuan ($1.1 trillion) this year, raise rates, and tighten reserve rules to choke inflation, while local authorities take their own measures to curb the property boom. Lead, zinc, copper, and nickel are all highly leveraged to China’s building cycle.

The Royal Bank of Scotland echoed the concerns, saying China has kept the prices of raw materials buoyant by sucking in the world’s supply. “A hefty proportion of these imports have undoubtedly been stockpiled, some by private speculators. We do not believe that much unreported stock has yet been eroded,” said the bank’s commodity team, Nick Moore and Stephen Briggs.

“Our central theme remains to be wary of a general price lapse for the commodity complex over the next six months – not a major price collapse, more of a hiatus. Then sunlit uplands beckon,” they said. RBS said a surge of pent-up supply from mines is “waiting in the wings to make its grand entrance” just at the wrong moment as the global recovery goes through a patch of turbulence.

The family of energy, metals, and farm goods has already lagged equity prices since the start of the year. The Reuters/Jefferies CRB commodities index peaked in January and is threatening to slip below its 50-day moving average, a key technical level.